Fibonacci extensions are a technical analysis tool that helps investors identify potential future price targets based on prior price movements. While Fibonacci retracements focus on possible reversal points during a correction within an existing trend, Fibonacci extensions aim to forecast where the next price swing may end after the correction. This tool is especially useful for pinpointing potential profit targets or exit levels in a trend continuation.
Basics of Fibonacci Extensions
Fibonacci extensions use the same ratios derived from the Fibonacci sequence, but apply them to predict longer-term price targets after a correction. The most commonly used extension levels are 61.8%, 100%, 161.8%, 261.8%, and 423.6%.
How to Draw Fibonacci Extensions
To plot Fibonacci extensions, traders must identify three key points: the start of the trend (Point A), the end of the trend move (Point B), and the end of the correction within that move (Point C). Using these three points, the tool then projects potential extension levels beyond Point B where the price may ultimately stall.
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Select Point A: Identify the beginning of a significant price move.
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Identify Point B: Mark the end of that price move.
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Mark Point C: Note the end of the correction within that move.
Example Application
Suppose a stock chart shows a major upswing from 100 PLN (Point A) to 200 PLN (Point B), followed by a pullback to 150 PLN (Point C). If the uptrend resumes, traders can use Fibonacci extensions to set potential targets. For instance, the 161.8% extension would suggest a price objective above 200 PLN.
Why It Works
Fibonacci extensions often succeed because financial markets are driven by human emotions, which tend to repeat in recognizable patterns. The Fibonacci ratios appear throughout nature and art, and similarly seem to manifest in market price behavior.
Limitations
Like all technical tools, Fibonacci extensions are not foolproof and work best when combined with other indicators and analysis methods. Markets are dynamic and unpredictable, and no tool can forecast future price moves with absolute certainty.
